AllAboutAlpha | Jan 05, 2015 01:24AM ET
This is the second in a series of articles focusing on the strengths of different indices that are published regularly and may be appropriate for benchmarking, risk assessment, and other real estate investment purposes. (The first article focused on two similar index families, the Moody’s/RCA Commercial Property Price Index (CPPI) and the CoStar Commercial Repeat-Sales Index (CCRSI), both of which measure monthly capital appreciation at the property level.) In this article I will focus on the NCREIF Property Index (NPI) published by the National Council of Real Estate Investment Fiduciaries.
The NPI measures average capital appreciation, average gross income, and average gross total return at the property level. It is published quarterly based on reports submitted by NCREIF data contributing members for more than 7,000 properties worth nearly $400 billion owned at least in part by tax-exempt institutional investors such as pension funds. It is available for the aggregate U.S. commercial property market as well as for several important market segments.
What It Measures:
o Capital appreciation is NET of capital expenditures on the property: that is, it is equal to the change in the value of the property minus capital expenditures. This is normal in real estate, but users need to be careful not to confuse capital appreciation with property appreciation. NCREIF also produces a measure of price change (appreciation in property value), but does not publish it with the NPI.
o Income is GROSS of capital expenditures. Again, users need to be careful not to confuse income as defined in the NPI with income from stocks, bonds, and other investments, which is likely to be NET of capital expenditures. NCREIF also produces a measure of cash flow (income net of capital expenditures), but does not publish it with the NPI.
Reporting Schedule and Access: The NPI is published roughly four weeks following the end of each quarter. It is available free to NCREIF data contributing members, while others who cannot qualify as data contributing members can purchase access to the data, here .
Geography: The NPI is available for a rich set of geographic areas, with data starting in 1978 Q1 for the nationwide aggregate, four regions (East Midwest, South, and West), and eight divisions (two in each region); some states have indices starting as early as 1978 Q1, while others do not yet have enough data for their own indices:
In addition, the NPI provides indices for 104 metropolitan areas, with data going back all the way to 1978q1 for Atlanta, Chicago, Dallas, Denver, Houston, Jacksonville, Los Angeles, Memphis, Oakland, Phoenix, St. Louis, San Jose, and Santa Ana.
Property Types: In addition to the all-property indices the NPI is published for five property types and 13 sub-types:
Geography/Type Combinations: There are a huge number of geography/type combinations available through the NPI, with several of them going back to 1978q1.
Weighting: The NPI is value-weighted.
Advantages: The great advantages of the NPI are the length of the available historical period and the number of geographic areas, property types, and combinations available. The other advantage of the NPI, for institutional investors such as pension funds, endowments, and foundations—is that it includes specifically properties owned (or co-owned) by other institutional investors, which tend to be concentrated in the higher-quality and more-expensive segments of the market.
Disadvantages: The great disadvantage of the NPI is the fact that it is based on appraisals rather than transaction prices.
Notwithstanding these disadvantages, the NPI can be very valuable for benchmarking, risk assessment, and other investment purposes, particularly when it is important to measure long-term average returns but not important to measure volatility (quarter-to-quarter variation) or correlations with other assets.
Disclosure: Brad Case is senior vice president, research & industry information for the National Association of Real Estate Investment Trusts (NAREIT). Dr. Case has researched residential and commercial real estate markets, domestically and globally, for more than 25 years. His research encompasses investment return characteristics including returns, volatilities, and correlations with other assets; measuring appreciation in property values; inflation protection; use of DCC-GARCH and Markov regime switching models to measure and predict investment characteristics; the length of the real estate market cycle; and the role of the investment horizon. He holds patents as the co-inventor of the FTSE NAREIT PureProperty(r) index methodology and the backward-forward trading contract. Dr. Case earned his Ph.D. in Economics at Yale University, where he worked with Robert Shiller and William Goetzmann, and holds the Certified Alternative Investment Analyst (CAIA) designation.
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